Senate passes online sales tax

WASHINGTON, D.C. – A bill that would allow states to collect sales taxes from online retailers outside their borders passed the Senate easily Monday evening in a bipartisan vote, 69 to 27, and will head to the House, where it faces a harder sell at its first stop, the Judiciary Committee.

It is a measure that has been 10 years in the making in Washington and marks the first time an online sales tax bill has come up for a binding vote in Congress, according to the National Retail Federation, a major supporter.

Passage of the Marketplace Fairness Act was not a surprise. In addition to the retail federation, the bill also had the support of large online retailers Amazon.com and Wal-Mart.

"As electronic commerce has grown dramatically, new policies are necessary to maintain a level playing field so that businesses of all types can compete and prosper," Sen. Barbara Boxer, D-Calif., said in a statement to The Register. Both she and California Democratic Sen. Dianne Feinstein voted for the bill.

For states, the stakes are large and growing. States are losing an estimated $23 billion a year in sales taxes, and Internet sales are projected to double over the next five years to $435 billion, said Dick Durbin, D-Ill., a co-sponsor of the bill.

Supporters say the bill will level the playing field between brick-and-mortar businesses and online sellers, and allow states to collect taxes they are owed without overburdening online retailers. States have latitude in administering the program that was absent in earlier approaches.

"This is about states' rights; it gives governors and legislators the opportunity to decide for themselves whether out-of-state sellers should do what in-state sellers already do – to collect sales taxes already owed when something is sold," said Sen. Lamar Alexander, R-Tenn., before the vote.

Critics say the bill favors the biggest Internet businesses, would stifle the formation of small businesses online and put undue obligations on existing Internet businesses. They question the constitutional right of a state to reach across its boundaries to collect taxes from those who have no say in the tax being levied.

"State and local governments will have taxing authority over businesses thousands of miles away," said Sen. Ron Wyden, D-Ore., in a speech on the Senate floor Monday. Sen. Ted Cruz, R-Texas, said the bill would hurt entrepreneurship, and he was not reassured by the exemption for businesses with less than $1 million in sales. "The Senate should treat the Internet as a safe haven ... for entrepreneurs," he said.

WALL STREET ASSESSMENT

"Small online retailers will be adversely affected because they now have to collect sales tax," said Sucharita Mulpuru-Kodali, principal analyst at Forrester Research. "How much of an influence remains to be seen. High-ticket categories like consumer electronics will be much more adversely affected than smaller-ticket, hard-to-find items.

"For some categories like consumer electronics, some shoppers may opt to purchase products in stores now. But for the most part, I don't expect Web retail to be affected much at all. The growth trajectory is unlikely to be impacted by this very small issue."

Mulpuru-Kodali said that online retailers charging a sales tax for purchases is unlikely to reduce showrooming – shoppers' practice of checking out goods in brick-and-mortar stores, then buying the items from an online site.

"Retailers have dynamic pricing algorithms that enable them to price products lower than their competitors regardless of tax issues," she said. "Sales tax, contrary to what some brick-and-mortar retailers have believed, doesn't 'even the playing field.'"

ON TO THE HOUSE

The strong Senate vote and Republican support raise the bill's prospects for passage in the House, where Reps. Jackie Speier, D-San Mateo, and Steve Womack, R-Ark., are introducing the House version of the Marketplace Fairness Act. So far, 25 Republicans and 40 Democrats are sponsors, according to Speier's office.

Lobbying has been intense. "We have a positive outlook for the House," said Rachelle Bernstein, vice president for the National Retail Federation. "I think the House wants to put its own mark on the legislation."

Unlike an earlier attempt to garner state cooperation, called the Streamlined Sales Tax Project, the new bill allows more flexibility to the states to shape their programs, Bernstein said.

A new law would essentially undo a 1992 Supreme Court decision, Quill v. North Dakota, which held that a retailer must have a physical presence in a state for that state to require it to collect sales taxes. At the time of that ruling, the court said Congress could overrule the court's decision through legislation.